- IRAs are available to nonworking spouses.
- IRAs allow a "catch up" contribution of $1,000 for those 50 and up.
- IRAs can be established on behalf of minors with earned income.
It's the time of year when IRA contributions are on many people's minds—especially those doing their tax returns and looking for a deduction. The deadline for making IRA contributions for the 2017 tax year is April 17, 2018.
Chances are, there may be a few things you don't know about IRAs. Here are 7 commonly overlooked facts about IRAs.
1. A nonworking spouse can open and contribute to an IRA
A non-wage-earning spouse can save for retirement too. Provided the other spouse is working and the couple files a joint federal income tax return, the nonworking spouse can open and contribute to their own traditional or Roth IRA. A nonworking spouse can contribute as much to a spousal IRA as the wage earner in the family. For 2017 and 2018, the IRA contribution limits are $5,500, or $6,500 for those over age 50. The amount of your combined contributions can't be more than the taxable compensation reported on your joint return.
2. Even if you don't qualify for tax-deductible contributions, you can still have an IRA
If you're covered by a retirement savings plan at work—like a 401(k) or 403(b)—and your 2017 or 2018 modified adjusted gross income (MAGI) exceeds applicable income limits, your contribution might not be tax deductible.1 But getting a current-year tax deduction isn't the only benefit of having an IRA. Nondeductible IRA contributions still offer the potential for your money and earnings to grow tax free until the time of withdrawal. You also have the option of converting to a Roth IRA (see No. 7, below).
3. After 2018, alimony will not count as earned income to the recipient
Unless something changes, you will likely not be able to use money received as alimony to fund an IRA after this year.
That's due to changes in the law introduced by the Tax Cuts and Jobs Act of 2017: After 2018, alimony payments will no longer be considered taxable income to the recipient.
4. Self-employed, freelancer, side-gigger? Save even more with a SEP IRA.
If you are self-employed or have income from freelancing, you can open a Simplified Employee Pension plan—more commonly known as a SEP IRA. Even if you have a full-time job as an employee, if you earn money freelancing or running a small business on the side, you could take advantage of the potential tax benefits of a SEP IRA. The SEP IRA is similar to a traditional IRA where contributions may be tax deductible—but the SEP IRA has a much higher contribution limit. The amount you can put in varies based on your earned income. For SEP IRAs, you can save 25% (20%2 for the self-employed) of the employee's compensation up to a $54,000 limit for 2017 contributions and $55,000 for 2018. The deadline to set up the account is the tax deadline—so for 2017 it will be April 17, 2018 (for a calendar-year filer). But, if you get an extension for filing your tax return, you have until the end of the extension period to set up the account or deposit contributions.
5. "Catch-up" contributions can help those age 50 or older save more
If you're age 50 or older, you can save an additional $1,000 in a traditional or Roth IRA each year. This is a great way to make up for any lost savings periods and make sure that you are saving the maximum amount allowable for retirement. For example, if you turn 50 this year and put an extra $1,000 into your IRA for the next 20 years, and it earns an average return of 7% a year, you could have almost $44,000 more in your account than someone who didn’t take advantage of the catch-up contribution.3
6. You can open a Roth IRA for a child who has taxable earned income4
Helping a young person fund an IRA—especially a Roth IRA—can be a great way to give them a head start on saving for retirement. That's because the longer the timeline, the greater the benefit of tax-free earnings. Although it might be nearly impossible to persuade a teenager with income from mowing lawns or babysitting to put part of it in a retirement account, gifting the contribution to an IRA on behalf of a child or grandchild can be the answer. The contribution can't exceed the amount the child actually earns, and even if you hit the maximum annual contribution amount of $5,500, that's still well below the annual gift tax exemption ($15,000 per person in 2018).
The Fidelity Roth IRA for Kids, specifically for minors, is managed by an adult until the child reaches the appropriate age for the account to be transferred into a regular Roth IRA in their name. This age varies by state. Bear in mind that once the account has been transferred, the account's new owner would be able to withdraw assets from it whenever they wished, so be sure to educate your child about the benefits of allowing it to grow over time and about the rules that govern Roth IRAs.
7. Even if you exceed the income threshold, you might still be able to have a Roth IRA.
Roth IRAs can be a great way to achieve tax diversification in retirement. Distributions of contributions are available any time without tax or penalty, all qualified withdrawals are tax free, and you don't have to start taking required minimum distributions at age 70½.5 But some taxpayers make the mistake of thinking that a Roth IRA isn't available to them if they exceed the income thresholds.6 In reality, you can still establish a Roth IRA by converting a traditional IRA, regardless of your income level.
If you don't have a traditional IRA you're still not out of luck. You could open a traditional IRA and make nondeductible contributions, which aren't restricted by income, then convert those assets to a Roth IRA. If you have no other traditional IRA assets, the only tax you'll owe is on the account earnings between the time of the contribution and the conversion. However, if you do have deductible contributions in another IRA, you'll need to pay close attention to the tax consequences. That's because of an IRS rule that calculates your tax liability based on all your traditional IRA assets, not just the after-tax contributions in a nondeductible IRA that you set up specifically to convert to a Roth. For simplicity, just think of all IRAs in your name (other than inherited IRAs) as being a single account.
Read Viewpoints on Fidelity.com: Answers to Roth conversion questions
Next steps to consider
Take advantage of potential tax-deferred or tax-free growth.
Determine which IRA may make sense for you.
This small percentage can add up to a lot in retirement.
Investing involves risk, including risk of loss.
For a Traditional IRA, full deductibility of a contribution for 2017 is available to active participants whose 2017 Modified Adjusted Gross Income (MAGI) is $99,000 or less (joint) and $62,000 or less (single); partial deductibility for MAGI up to $119,000 (joint) and $72,000 (single). In addition, full deductibility of a contribution is available for working or nonworking spouses who are not covered by an employer-sponsored plan whose MAGI is less than $186,000 for 2017; partial deductibility for MAGI up to $196,000. For 2018 full deductibility of a contribution is available to active participants whose 2018 Modified Adjusted Gross Income (MAGI) is $101,000 or less (joint) and $63,000 or less (single); partial deductibility for MAGI up to $121,000 (joint) and $73,000 (single). In addition, full deductibility of a contribution is available for working or nonworking spouses who are not covered by an employer-sponsored plan whose MAGI is less than $189,000 for 2018 partial deductibility for MAGI up to $199,000.
A distribution from a Roth IRA is tax free and penalty free, provided the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½, disability, qualified first-time home purchase, or death.
Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.
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